morning report sounds good

17-Jan-2012

Morning Report\
Sundance Resources Ltd (SDL.ASX) – M&A in the Congo. AKI gone, SDL next?
Today’s Top Picks

Sundance Resources Ltd (SDL.ASX, Mkt Cap $1.2b) – AKI gone, SDL next?

•Our analysts held a conference call with SDL late last week for an update on the status of the $1.7b/$0.57 per share takeover bid by Sichuan Hanlong Group and the various conditions required to progress Phase 1 of the Scheme Implementation Agreement.
•Exxaro’s ~$340m bid for African Iron (AKI.ASX) last week again highlighted the attraction of West African iron ore projects to majors and we believe that SDL is likely to be next to go. The market is significantly discounting the chances of the Hanlong deal getting up given the current trade of $0.40/sh versus bid price of $0.57/sh. The market’s major concern centres on Hanlong’s ability to finance the deal following the failure to produce a ‘highly confident’ letter by the deadline date of November 28. SDL have since waived that requirement. There is also concern about the ability to be granted mining permits by the end of February.
•A quick refresher as to the key requirements for getting the deal over the line by May and our view on each:
1.Mining Convention in Cameroon and Mining Permit in Congo received by 29 February.
- FSB view: The Presidents and Prime Ministers for both Cameroon and the Congo have previously expressed their support for the project which will go a long way to ensuring the concession (Cameroon) and permit (Congo) are awarded. We also note that President Biya was recently re-elected as President of Cameroon which provides for expected continuity of mining and investment framework in the country. Finally, the construction of the infrastructure necessary to support the Mbalam operation is expected to lead to further significant development within the region with the likes of Core Mining (Avima) and Affero (Nkout) bringing their respective projects online and adding further jobs, royalties and taxes to the economies. The Cameroon Government recently demonstrated their support for the Mbalam Project declaring land identified for the proposed rail corridor as ‘Land for Public Utility’ allowing for the construction of the rail line to the deepwater terminal at Kribi. This all leads us to believe the convention and permit will be awarded, however we believe this may be a struggle to achieve by the end of February, which would likely lead to an extension of the Hanlong/SDL agreement, price renegotiation or both parties going their separate ways. Of the three key conditions this carries the greatest risk in our view of not being met by the deadline date.

1.Hanlong produce a ‘highly confident letter’ for financing from China Development Bank by Nov 28 (this has since been waived by SDL).
- FSB view: Our understanding is that Hanlong and China Development Bank remain committed to the acquisition and financing, despite their inability to produce a ‘highly confident’ leter by November 28 last year.
1.FIRB approval.
- FSB view: ASIC are currently investigating two of Hanlong’s employees for alleged insider trading and there is a view FIRB approval will be delayed because of this. However we can’t see how this affects the bid or FIRB’s decision on approving the transaction. The fact is that the ASIC investigation is into the employees (i.e. not company) and the asset is in the Congo and therefore is not strategically important to Australia. Indeed, the African Iron transaction last week set a precedent for iron ore assets in the Congo with FIRB granted prior to the announcement in that instance. Bottom line, we’d be very surprised to see FIRB knock back the bid.

•Obviously the stock represents a great value when you consider the current price of $0.41 is around the same level to where it was in July last year when Hanlong launched the first bid at $0.50. Consequently there is an opportunity to make 40% upside should it get over the line. Annualised, that’s an impressive ~150% return. The key risk in our view is that the Convention and Permit are not awarded by the end of February leading to a potential change in terms or extension of timeline.
•Mbalam is a world class project expected to produce 35mtpa over a long mine life of +25yrs (10yrs DSO, +15yrs itabirite). The project straddles Cameroon and the Congo. Whilst the capex of almost $5b is very high (particularly for a company with a market cap of ~$1b presently) given the requirement to build 500kms of rail through the jungle, the cash flow from the operations once up and running will deliver significant returns to the owner... Assuming conservative FOB price of say US$60/t and the DFS opex of ~US$20/t, the project will be generating annualised EBITDA of ~US$1.4b, which is a pretty quick payback. For these reasons we believe there will be plenty of other majors ready to pounce should the Hanlong deal not get over the line and they look to sell their 18% stake (Vale, Xstrata, Glencore, etc). Prior to Hanlong’s first bid on SDL, CEO Giulio Casello stated that there were 5 corporates doing DD on the project and we find it hard to believe that they wouldn’t still be very interested.